Ahead Today
G3: Germany IFO Business Expectations, US Import Price
Asia: South Korea Retail sales
Market Highlights
Brent oil prices fell to US$100/bbl while the Dollar weakened, as President Trump signalled that Iran had offered a “present” as a show of good faith in negotiations he claimed are ongoing. It is unclear what this gift is, but he said that it is “worth a tremendous amount of money”. Meanwhile, the NY Times and other news outlets reported that the US has sent a 15-point proposal to Iran aimed at ending the conflict, while also proposing a one-month ceasefire in the midst of negotiations. While the exact contours are not officially known, latest reports suggest that the proposal addresses areas such as Iran’s nuclear program and ballistic missile capabilities. Meanwhile, in return the US will offer Iran full sanctions relief, support for a civilian nuclear energy program and a removal of the “snapback” mechanism for reimposing international sanctions.
Ultimately we continue to think that negotiations will be very difficult, and hence our message to clients in Asia is to look to engage in some additional hedges if better levels in markets allow and/or reduce some risk as we head into the weekend. We are ultimately cautious in reading too much into what the US side is claiming at this point in time. For one, Iran seems likely to toughen its negotiating stance including continued control over the Strait of Hormuz and among other key demands, and it’s unclear how regional Gulf states and Israel will take the deal including the US’ ultimate role in the Strait. Second, the US is reportedly sending in its elite 82nd Airborne unit even in the midst of purported negotiations, raising continued risk of military intervention and boots on the ground. Third, with the regime in Iran now more hardline and dominated by the IRGC including appointing Mohammad Bagher Zolghadr as the new chief of the Supreme National Security Council, the prospects of Iran actually accepting these terms seem quite remote.
From Asia’s perspective, time is of essence on the Strait of Hormuz, and it’s not just about oil prices but also about potential energy shortages in this crisis. The longer the Strait of Hormuz remains closed, the greater the chance of fuel shortages showing up across Asia, and if anything the effective domestic fuel prices that Asian countries are facing is as such far higher than implied by headline Brent oil changes. As an example, diesel and gasoline pump prices in the Philippines jumped by 60-90% in March alone. The Philippines’ President yesterday announced a National Energy Emergency, while also highlighted in an interview the risk of potentially grounding planes and cutting flights as a very real consequence of the current crisis in the Middle East.